Climate Change Policy: Contrasting the U.S. and the European Union Approaches
by
Margo Thorning, Ph.D.
Senior Vice President and Director of Research
American Council for Capital Formation Center for Policy Research
The American Council for Capital Formation Center for Policy Research prepared this Special Report for the
European Commission Conference on EU-United States Relations held July 6, 2000 in Brussels. More detail is
available on the economics of climate change policy at the Center’s Web site, www.accf.org.
INTRODUCTION
In response to the concerns of environmental groups and some in the scientific community about the possibility of
large-scale global warming attributable to human activities, a series of international meetings on climate policy were held
starting in 1990. These meetings culminated with the Kyoto Protocol to the United Nations Framework Convention on
Climate Change, which the United States negotiated in December, 1997. The Protocol calls for industrial economies such
as the United States, Canada, Europe, and Japan to reduce their collective emissions of six greenhouse gases by an average of 5.2 percent from 1990 levels by 2008–2012. The U.S. target is a 7 percent reduction from 1990 levels. This amounts
to a projected 538 million metric ton cutback in carbon emissions relative to the projected amount in 2010, or about a
30 percent reduction in emissions compared to the baseline forecast. The EU target is an 8 percent reduction.
Since the negotiation of the Protocol in 1997, differences in the U.S. and EU approaches to the issue have become
sharper. The U.S. Senate, which must consent to ratification of any treaty negotiated by a U.S. President before the
treaty can become law, has made its objections to the treaty very clear. The passage in 1997 of the bipartisan Byrd-Hagel
Resolution in the Senate by a 95 to 0 vote shows the seriousness of congressional opposition to the Kyoto Protocol. The
Byrd-Hagel Resolution states that the Senate will not ratify any climate policy treaty that negatively impacts U.S. economic growth or fails to require developing country participation in emission cutbacks in the same time frame as cutbacks for developed countries.
In contrast, the EU, through its ruling body, the European Commission, has embraced (in principle) the near-term
emission cutbacks required by the Protocol. On June 22, 2000, the EU’s Environmental Council adopted a set of
Conclusions on the Community’s strategy on climate change, including setting the rules for the different mechanisms and
instruments for cutting greenhouse gas emissions in the Kyoto Protocol. What factors, economic, political, or cultural, can
explain the different paths (and timetables) to climate change policy favored by many U.S. policymakers and those of its
ally, the European Union?
FACTORS CONTRIBUTING
TO
U.S.-EU DIFFERENCES TOWARD CLIMATE POLICY
In recent years there has been a substantial amount of research on the economic impact of the Protocol on the United
States. Thus, U.S. policymakers realize the potentially serious impact of near-term emission reductions. In the EU, in contrast, there does not seem to have been many macroeconomic analyses of how domestic CO2 cutbacks would affect economic growth and living standards for the Union as a whole or for the individual member countries.
■ Economic growth
Numerous analyses of the impact on the United States of the sharp, near-term CO2 emission cutbacks required under
the Kyoto Protocol by climate policy experts in government, academic and consulting firm experts show a significant negative impact on Gross Domestic Product. For example, the U.S. Department of Energy’s Energy Information
Administration (EIA) calculates that GDP losses would range from 2 percent to 4.2 percent by 2010, depending upon
AMERICAN COUNCIL FOR CAPITAL FORMATION
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Climate Change Policy: Contrasting the U.S. and the European Union Approaches
Page 2
2
2
Federal budget surplus
Percent change from baseline
how much of the United States’ reductions could be obtained by emissions trading abroad (see Figure 1). Other
studies by climate policy experts show losses ranging from 1 percent to 3.2 percent of GDP; a major determinant
of the “hit” to GDP is the assumption about the amount of emissions trading.
The studies show that as CO2 emissions are reduced, economic growth slows
Figure 1 Impact of Reducing CO2 Emissions on
due to lost output as new energy taxes are
U.S. GDP, 2008–2012
imposed and prices rise for carbon-intenCompared to the baseline forecast
sive goods—goods that must be produced
using less carbon and/or more expensive
Manne/
Manne/ Admin.
DOE/
CEA
Richels
CRA
DRI
Yohe
CRA
Richels
EIA
WEFA
processes. In addition, the capital stock
(T)
(NT)
(T)
(T)
(T)
(NT)
(T)
(NT)
(NT)
0
accumulates more slowly, reflecting the
-0.01%
-0.3%
premature obsolescence of capital equip-1
-0.9%
ment due to the sharp energy price
-1.0%
-1.3%
-1.3%
increases required to meet the CO2 emis-1.6%
-2
sion reductions mandated under the
Protocol. It takes from 20 to 30 years to
CO reduction to Kyoto target
-3
“turn over” or replace the entire U.S. cap-3.2%
CO reduction to 1990 levels
ital stock. Thus, meeting the Protocol’s
(Clinton pre-Kyoto target)
-4
2008–2012 timetable for emission reducT = with trading; NT = no trading
-4.2%
tions would mean either continuing to
-5
utilize plant and equipment designed to
use much lower-cost (pre-Kyoto) fuels, or
replacing the capital stock much more
Figure 2 Reduction in Federal On-Budget Surplus
rapidly than its owners had planned.
in 2010 Due to Lower GDP Caused by CO2
Emission Reductions
■ Budgetary Impacts
Dollars in billions
U.S. policymakers, especially those in
the U.S. Congress, are mindful of the
$341
350
interactions between sharp CO2 emission
$295
cutbacks, slower economic growth, and
300
federal budget receipts. Using a simple
$249
calculation based on the relationship of
250
increases in GDP to federal tax receipts, if
$203
growth falls by 3 percent per year, the pro200
jected federal budget surplus falls from
$157
$341 billion dollars in 2010 to only $203
150
billion (see Figure 2). Therefore, implementation of the Kyoto Protocol would
100
make it much more difficult for the
50
United States to sustain tax cuts and promote the retirement security of the “baby
0
boom” generation, and could require
Budget surplus
Surplus with Surplus with Surplus with Surplus with
sharp changes in fiscal policy in order to
if no CO2
4% lower
3% lower
2% lower
1% lower
reductions
growth
growth
growth
growth
avoid deficit spending. If the projected
federal budget surpluses fail to materialize,
Note: “On-budget” surplus excludes Social Security and postal service contributions.
the negative growth impact of the
Calculations based on “The Budget and Economic Outlook: An Update,”
Protocol would be even more difficult to
Congressional Budget Office, July, 2000.
assimilate.
Margo Thorning, Ph.D.
ACCF Center for Policy Research
Climate Change Policy: Contrasting the U.S. and the European Union Approaches
Page 3
■ Impact on Employment, Consumption, Income Distribution, and Living Standards
Percent change from baseline
Policies to curb emissions to meet the Kyoto target would have a significant impact on U.S. households’ economic well being and living standards, as well as negatively affect the distribution of income. For example, estimates of job losses range from 1.3 million (Dr. Joyce Y. Brinner of DRI) to 2.4 million (Ms. Mary Novak of WEFA)
by 2010. Consumption by U.S. households falls by over 2 percent under the
Figure 3 Impact of Reducing CO2 Emissions to
Kyoto emissions target, according to DRI.
1990 Levels by 2010 on U.S. Household
Curbing CO2 emissions would also
Income by Quintile
reduce wage growth by 5 to 10 percent,
according to Professor Gary W. Yohe of
4
Lowest
Second
Third
Fourth
Highest
Wesleyan University. Moreover, it would
Quintile
Quintile
Quintile
Quintile
Quintile
worsen the distribution of income in the
2
United States, according to the analyses
0
of both Professor Yohe and Ms. Novak.
For example, based on a standard measure
-2
of the degree of income inequality among
a country’s population called the GINI
-4
coefficient, Professor Yohe’s analysis of
the impact of reducing emissions to 1990
-6
levels shows that carbon taxes, even
when recycled through personal income
-8
tax reductions, cause relatively large loss-10
es in the poorest quintile (lowest one-fifth
of the population). These losses, added to
Note: A $260 per ton tax or tradable permit price of that amount would be needmodest losses in the middle quintiles, proed to reduce emissions to 1990 levels by 2010 if emission reductions begin in 1997
vide gains for the richest fifth of the popor 1998. The analysis assumes the tax is rebated through reductions in the personal income tax.
ulation (see Figure 3).
■ U.S. Competitiveness for EnergyIntensive Sectors and Agriculture
Source: Gary W. Yohe, “Climate Change Policies, the Distribution of Income,
and U.S. Living Standards,” in Climate Change Policy, Risk Prioritization, and
U.S. Economic Growth (Washington, D.C.: American Council for Capital
Formation Center for Policy Research, June 1997), pp. 13–54.
Several studies, including those by
Dr. Brian Fisher and his colleagues at the Australian Bureau of Agricultural and Resource Economics, University
of Colorado’s Professor Thomas Rutherford, DRI’s Dr. Brinner, and WEFA’s Ms. Novak, have concluded that nearterm emission reductions would result in the migration of energy-intensive industry from the United States to
non-Annex I countries (sometimes called “carbon leakage”).
A 1999 study by Professor Alan S. Manne of Stanford University and Dr. Richard G. Richels of EPRI also analyzed this question. Their model results suggest that the Kyoto Protocol could lead to serious competitive problems
for energy-intensive sector (EIS) producers in the United States, Japan, and OECD Europe. Meeting the emissions
targets in the Protocol would lead to significant reductions in output and employment among EIS producers, and
there would be offsetting increases in countries with low energy costs. U.S. output of energy-intensive products
such as autos, steel, paper, and chemicals could be 15 percent less than under the reference case by 2020. In contrast, countries such as China, India, and Mexico would increase their output of energy-intensive products. In its
present form, the Protocol could lead to acrimonious conflicts between those who advocate free international trade
and those who advocate a low-carbon environment, Professor Manne and Dr. Richels conclude.
U.S. agriculture would also lose competitiveness if the United States complied with the Kyoto Protocol.
Another study based on the DRI model predicts that implementation of the Protocol would cause higher fuel oil,
motor oil, fertilizer, and other farm operating costs. This would mean higher consumer food prices and greater
Margo Thorning, Ph.D.
ACCF Center for Policy Research
Climate Change Policy: Contrasting the U.S. and the European Union Approaches
Page 4
demand for public assistance with higher costs. In addition, by increasing the energy costs of farm production in
America while leaving them unchanged in developing countries, the Kyoto Protocol would cause U.S. food
exports to decline and imports to rise. Reduced efficiency of the world food system could add to a political backlash against free trade policies at home and abroad.
IMPORTANCE
OF INTERNATIONAL
EMISSIONS TRADING
Billions of metric tons of carbon
The United States and the EU differ in their views on the use of emissions trading to reduce the economic
cost of CO2 reductions. Unrestricted global emissions trading is seen as a practical approach in the United States
while EU policymakers want to limit the use of this option. Numerous studies show that a major determinant of
the cost of curbing emissions is whether the United States can purchase permits from abroad where emissions can
be reduced at a lower cost than in the United States. In the absence of an unfettered international trading system, the United States would be forced to curb its own CO2 emissions by about 30 percent within 10 years. Due
to population growth and increases in output, the gap between projected emissions and the Kyoto target will continue to grow. This growing gap has not been addressed by Kyoto advocates.
If the United States is not able to take advantage of “where” flexibility (reducing emissions wherever it is
cheapest globally) by using international emissions trading to meet the Kyoto target, the cost in terms of lost output ranges from about 1 percent of GDP, according to a recent study by Professor Manne and Dr. Richels, to 4.2
percent of GDP as estimated by EIA.
Full global trading in emissions, meaning that developing nations such as China, India, and Brazil are participating in a global emissions reduction effort, could reduce costs to 0.3 percent of GDP, according to the
Manne/Richels study. (See Figure 4 for a
geographic breakdown of emissions
Figure 4 Global Carbon Emissions: Reference Case
growth.) Most policy experts, including
Professor Manne and Dr. Richels, doubt
25
that these developing countries can be
Canada, Australia, & New Zealand
Rest of World
induced to participate in the foreseeable
Japan
Mexico & OPEC
20
future. Emissions reductions accomWestern Europe
India
ROW
plished through limited trading schemes
USA
China
(involving only Annex I and Eastern
15
E. Europe & former Soviet Union
Mex. & OPEC
Europe), which most experts believe are
India
realistic, would cut U.S. GDP growth by
10
between 0.9 percent annually, according
China
to Dr. W. David Montgomery of CRA and
5
Professor John R. Moroney of Texas
Can., Aust., & NZ
Japan
EEFSU
A&M University, and 1.6 percent annuW. Europe
USA
ally as estimated by Dr. Brinner of DRI.
0
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1990
CULTURAL AND POLITICAL
DIFFERENCES
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
Source: Alan S. Manne and Richard G. Richels, “The Kyoto Protocol: A
Cost-Effective Strategy for Meeting Environmental Objectives?” In Climate
Change Policy: Practical Strategies to Promote Economic Growth and
Environmental Quality (Washington, D.C.: American Council for Capital
Formation Center for Policy Research, 1999), pp. 3–23.
Similar as their views are on many
economic and political issues, Americans
and their allies in the EU differ in their
approach to government policymaking as well as the seriousness with which they take legislated environmental
or other mandates.
First, in the United States there is growing support for the use of cost-benefit analysis to assess the desirability of implementing various policy proposals. Thus, the high cost of implementing the Kyoto Protocol (estimates
by numerous climate change modelers show U.S. GDP losses averaging about 2 to 3 percent annually by 2010)
Margo Thorning, Ph.D.
ACCF Center for Policy Research
Climate Change Policy: Contrasting the U.S. and the European Union Approaches
Page 5
makes a careful calculation of benefits imperative. For example, Yale University Professor William D. Nordhaus
estimates that the costs of even an efficiently designed emission reduction program exceed the value of environmental benefits by a ratio of 7 to 1 and that the United States would bear almost two-thirds of the global cost.
Thus, U.S. policymakers and decision makers in the private sector question the wisdom of the Clinton
Administration’s signing the Kyoto Protocol. Given that the U.S. Senate must consent to ratification of any treaty
before it goes into effect, it seems very unlikely the Protocol will ever become law.
Second, Americans believe in the sanctity of the law and thus in the importance of drafting legislation with
major economic, social, or political consequences with great care. The U.S. business community has every reason
to expect that if it fails to comply with a legislative statute (for CO2 emission rationing, for example) that the
government will impose substantial economic penalties or even prison terms for senior management. In the
European Union, by contrast, the governments have the reputation for taking a more conciliatory attitude toward
regulatory enforcement.
Third, Americans tend to be practical and results-oriented. When faced with an impractical, unachievable
goal such as reducing U.S. CO2 emissions by 30 percent compared to the baseline forecast by 2010, their natural
inclination is to examine the goal and see how to modify it in a cost-effective way. Several studies, including one
recently released by the Pew Center on Global Climate Change as well as one by Ms. Novak of WEFA, conclude
that the European Union is also unlikely to meet its emission reduction targets by 2010. In fact, Eileen Claussen,
former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs and
one of the original U.S. negotiators for the Kyoto Protocol, has recently stated that the treaty should be renegotiated because the targets and timetables are unachievable. In light of these realities, it seems hypocritical of the
European Commission to insist that the United States try to meet the Kyoto Protocol target.
CONCLUSIONS: STRATEGIES
FOR THE
FUTURE
If, as knowledge of the climate system increases, policy changes to reduce CO2 emissions become necessary,
these changes should be implemented in a way that minimizes damage to the U.S. economy. Above all, experts
agree that voluntary measures clearly and cost-effectively reduce the growth in greenhouse gas emissions, as the
U.S. Second National Communication to the Framework Convention on Climate Change noted in 1997.
Modifications to U.S. tax policy that reduce the cost of capital for energy-efficient investment should be part of
the voluntary measures.
Reducing global CO2 emissions should be a gradual process, according to Pacific Northwest National
Laboratory’s Dr. Jae Edmonds, Mr. James Dooley, and Mr. Marshall Wise. Moreover, a recent study by Dr.
Edmonds, Mr. Dooley, and Dr. Sonny Kim concluded that the introduction of carbon capture and sequestration
from central power facilities, the introduction of hydrogen fuel cells as an option for both power generation and
transport, sequestration of carbon in the soil, and afforestation and reforestation would enable the economy to
rely less heavily on sharp near-term emissions reductions to achieve a particular concentration level. For example, carbon sequestration at power plants and fuel cell use for electric power generation and transportation could
cut the present discounted cost of satisfying a 550 parts per million by volume atmospheric constraint by more
than 60 percent.
In short, the consensus of the noted climate policy scholars whose work is discussed above is clear. Given the
need to maintain strong U.S. economic growth to address such challenges as a growing population, the retirement
of the baby boom generation, and a persistent trade deficit, policymakers need to weigh carefully the Kyoto
Protocol’s negative economic impacts and its failure to engage developing nations in full participation. Adopting
a thoughtfully timed climate change policy—based on accurate science, improved climate models, global participation, tax incentives to accelerate investment in energy efficiency and sequestration, and new technology—is
essential, both to U.S. and global economic growth and to eventual stabilization of the carbon concentration in
the atmosphere, if growing scientific understanding indicates such a policy is needed. ❖
Margo Thorning, Ph.D.
ACCF Center for Policy Research
Climate Change Policy: Contrasting the U.S. and the European Union Approaches
Page 6
SOURCES
ACCF Center for Policy Research. 2000. The Kyoto Commitments: Can Nations Meet Them With the Help of Technology? Washington, D.C.:
American Council for Capital Formation Center for Policy Research. Contains work by Mary Novak and Brian Fisher.
ACCF Center for Policy Research. 1999. Climate Change Policy: Practical Strategies to Promote Economic Growth and Environmental Quality.
Washington, D.C.: American Council for Capital Formation Center for Policy Research. Contains work by Jae Edmonds, James
Dooley, and Sonny Kim; Alan S. Manne and Richard G. Richels; Joyce Y. Brinner; and John R. Moroney.
ACCF Center for Policy Research. 1997. Climate Change Policy, Risk Prioritization, and U.S. Economic Growth. Washington, D.C.:
American Council for Capital Formation Center for Policy Research. Contains work by Jae Edmonds, James Dooley, and Marshall
Wise; and Gary W. Yohe.
ACCF Center for Policy Research. 1996. An Economic Perspective on Climate Change Policies. Washington, D.C.: American Council for
Capital Formation Center for Policy Research. Contains work by W. David Montgomery and Thomas Rutherford.
Bernstein, Paul M., and W. David Montgomery. 1998. How Much Could Kyoto Really Cost? A Reconstruction and Reconciliation of
Administration Estimates. Washington, D.C.: Charles River Associates.
Council of Economic Advisers. 1998. The Kyoto Protocol and the President’s Policies to Address Climate Change: Administration
Economic Analysis. July.
Nordhaus, William and Joseph Boyer. 1999. Requiem for Kyoto: An Economic Analysis. In The Costs of the Kyoto Protocol: A Multi-Model
Evaluation, ed. John P. Weyant. The Energy Journal, Special Issue.
Novak, Mary H. 1998. Global Climate Change, Environmental Quality, and U.S. Living Standards: The Impact on Consumers. In The
Impact of Climate Change Policy on Consumers: Can Tradable Permits Reduce the Cost?, 3–18. Washington, D.C.: American Council for
Capital Formation Center for Policy Research.
Margo Thorning, Ph.D.
ACCF Center for Policy Research